Raising pressure on banks, the Federal Reserve is wading into the investigation of whether mortgage lenders cut corners and used flawed documents to foreclose on homes.
Major banks are already under investigation by state officials with subpoena power, who could force them to detail how they handled hundreds of thousands of foreclosure cases.
Federal Reserve Chairman Ben Bernanke added weight to those efforts Monday by saying the central bank would look “intensively” at policies and procedures that might have allowed banks to seize homes improperly.
“We take violation of proper procedures very seriously,” Bernanke said in remarks to a housing-finance conference in Arlington, Va.
The Fed has the power to impose penalties on some of the nation’s largest banks. Still, most legal experts expect an investigation by attorneys general in all 50 states to have a swifter and more lasting impact.
Big mortgage lenders are looking into whether employees signed foreclosure documents without reading them. Some banks have halted tens of thousands of foreclosures since similar practices became public.
While the banks say there’s little if any evidence that any foreclosures were improper, regulators around the country have suggested the banks were in a rush to foreclose and may have committed outright fraud.
Bank of America and Ally Financial Inc.’s GMAC Mortgage have started processing foreclosures again, after calling a temporary halt while they reviewed mortgage documents.
It’s happening as the housing market struggles to recover. Sales of previously occupied homes rose 10 percent in September, but the foreclosure problem surfaced only at the end of the month. Industry experts say fears could keep buyers on the sidelines now.
Ohio Attorney General Richard Cordray said Bernanke’s speech will force financial institutions to take the matter more seriously. In stepping up their inquiries, the Fed and other bank regulators are “not giving aid and comfort to institutions that want to sort of minimize this and almost sweep it under the rug,” Cordray said.
The Fed is working with the Treasury Department’s Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. They have a range of options. They include ordering companies to stop certain practices, imposing fines and working with lenders to come up with a fix. Bernanke provided no details in his speech about any penalties being weighed.
According to two officials familiar with the joint federal inquiry, the banking agencies are looking into whether companies had controls in place when foreclosure documents were signed and whether employees involved in the foreclosure process were adequately trained. The officials spoke on condition of anonymity because they weren’t authorized to speak about the inquiry.
Ultimately, though, the mess will probably be settled by the states.
“They can move more quickly than the Fed, and I think they have more leverage over banks to get them to quickly settle,” said Mark Williams, a former bank examiner at the Fed and now a lecturer at Boston University.
Some analysts suggested the Fed is trying to send the message that it’s helping to manage the foreclosure controversy. The central bank shared blame with other federal regulators for failing to head off the 2008 financial crisis.
“The Fed is already late to the crime scene,” Williams said.
Like the Obama administration, Bernanke and other federal regulators have declined to call for a national moratorium on foreclosures. At least one regulator, Sheila Bair, chairman of the FDIC, is even discouraging homeowners from overloading the courts with lawsuits.
“The regrettable truth is that many of the properties currently in the foreclosure process are either vacant or occupied by borrowers who simply cannot make even a significantly reduced payment,” Bair said in a speech Monday.
In home markets that have been devastated by the housing bust, the paperwork mess is already causing buyers to be wary of purchasing homes in foreclosure. Some buyers are worried the sale will be canceled because the previous owners were wrongly foreclosed on.
Roy Weiner, a Las Vegas real estate agent who specializes in foreclosures, said potential buyers of those properties have been aggressively inquiring about which bank holds the defaulting borrower’s loans – and whether the foreclosure was handled properly.
“They are asking a whole lot more questions,” Weiner said.